Crawford School of Economics and Government - Assignment Example

TOPIC: Crawford School of Economics and Government Student’s Name: Course Code: Instructor’s Name: Date: Introduction Most countries around the world have exceptionally eliminated barriers so as to trade. The level of trade among countries has increased greatly resulting in rise in standards of living around the world .The foundation of this system was laid down with the multilateral trading system that was established by the General Agreement on Tariffs and Trade after World War Two and continued under the WTO. This new system has emerged in parallel with the traditional system of managing relations among states to promote political goals and advance national security. Trade liberation promotes economic interdependence between countries and can directly enhance national security. The global interest in FTAs is an integral part of this process of promoting economic integration of states. FTAs are legally binding agreements involving two or several states to remove all barriers to trade between them. In recent years FTAs have become increasingly popular. FTAs are seen as easier to negotiate than multilateral agreements, as there are unlikely to be as many contentious issues. Furthermore, countries can set more ambitious goals for full liberalization in the context of an FTA where such goals may not win support in larger forums. Commitment to facilitate freedom of trade and investment between two countries has become an important way of building and cementing a closer relationship between them. This essay therefore looks at the case with Australia and seeks to explore and analyze issues in global trade liberalization by looking at the relationship between the WTO and the regional trade agreements (RTAs).It will further look at the nature and characteristics of the regional trade agreements and ascertain whether the existing regional free trade agreements support or undermine progress in the WTO towards removing barriers to trade and investment. Regional trade agreements (RTAs) are signatories made by regional governments in one region to liberalize and facilitate intra regional trade, by establishing either free trade areas or custom unions. Regional trade has been gaining increasing importance in the international economy and it accounts for 55% of total global trade. Presently, RTAs dominate on 40% of international trade. The stumbling in multilateral negotiations, as well as their ramification and complexity, has led to more promotion of regional trade day after day. RTAs offer a number of benefits to the member countries, considering their various types. They also contribute in developing the region, and they increase the activity of their countries in the multilateral trade system. RTAs are main part of developmental plans for most developed and developing countries. Despite the fears that RTAs may have negative impacts on international trading system, total number of these agreements is still increasing rapidly, especially after 2000. This direction gained more depth with the accession of great economic blocs and important developing countries to the ground of competition, motivated by their desire to get wider market accession. RTAs are notable phenomenon that is irreversible. During recent years, the number of preferential agreements, as well as preferential trade portion of global trade, has been continuously increasing. For example, in 2004, WTO secretariat received 43 RTA notifications, which makes the year 2004 a historical year for the RTAs. WTO members deal with RTAs as a policy- trading tool, or as a complementation to the Most Favored Nation (MFN) policy. Economic considerations are one face of RTAs complex strategy, but there are several other faces, such as political considerations and others. This proliferation of RTAs is a challenge and an advantage for the WTO and multilateral system at the same time. The critical role of regional blocs is embedded in shrinking economic impacts of countries’ boarders in one region3 (Khor, 2005). Australia has in the past shown its interest in negotiating for a Free Trade Agreement (FTA) with various countries including the United States. The successful growth in the US economy over the last decade has excited the interest of many countries around the world in closely linking their economies with the US. In so doing, they hope not only to improve access to the world’s largest consumer market, but also to secure the attention and gain the confidence of the world’s largest source of investment capital. In seeking to negotiate an FTA with the US, Australia would be joining a trend not restricted to the US alone. Global interest in using free trade agreements to expand trade, investment and other economic linkages between countries has increased dramatically. Therefore; it would be a significant step for Australia. An agreement with the other countries would add a new dimension to Australia’s trade policy. In the case with Australia, there has already been some debate about the advantages and disadvantages of an FTA with the United States. Various arguments have been put forward in favor of the agreement. These include: Increase in investment and trade between the two countries. Production of dynamic benefits from closer economic links with the world’s biggest and most competitive economy and the heartland of the Information Economy; Strengthen the overall bilateral relationship; and Give momentum to liberalization in the WTO and in AP The relationship between the WTO and FTAs If RTA rules were in harmony with the WTO multilateral rules, the RTA would be complimentary to the multilateral liberalization, but if the RTA was discriminatory against third parties, or was imposing complex net of trading system, then it would be in conflict with WTO rules and multilateral trading system. The stumbling in Doha Round negotiations resulted in strengthening regional relationships. Some countries claim that their participation in RTAs would motivate competitively multilateral liberalization through developing trade liberalization in several fronts. Other countries are attracted to RTAs as a mean to protect their market accession, in shade of absence of MFN liberalization. The following features show the relationship between WTO and RTAs. 1. WTO and RTAs share the same target, which is trade liberalization. However, RTAs are discriminatory, which is contrary of the WTO. Tracing the same target with different avenues can result in bilateral tensions. Considering that maintaining trade liberalization based on MFN principle is facing increasing difficulties, and that sectors of interest for some countries are exempted from multilateral negotiations' agenda, there would be no choice to resume trade through RTAs. RTAs allow members to liberalize specific favorable markets. 2. MFN liberalization's supporters believe that prevalence of RTAs would cause a hindrance to international trade model, which the WTO tries to establish, and would undermine the transparency and predictability in international trade. They also believe that RTAs can cause difficulties for third parties through reducing attentions paid to multilateral trade agenda, and generating deep-rooted interests and benefits among RTA member countries, which will persuade them later to resist international efforts for shrinking margins of preferences. This could then result in tensions hence threatening developmental balance in the WTO through increasing investment and trade variety, especially if the liberalization is preferential. Another possible effect is threatening work and production environment. This is because RTAs may raise production costs through legislative complexities, and shift the production from which comparative benefit is dominating to where preference is prevailing (ESCWA, 2007). Article 24 of WTO agreement about tariff and trade declared that RTAs are allowed in case the RTA implies complete elimination of tariffs among RTA members. The article conditioned the permission to delivering a timetable for gradual elimination of tariffs, and to ensure that intra RTA trade is at least 80% of total region trade in developing countries. However multilateral trading agreement that reduce protectionism, especially in areas that developing countries have comparative advantages in them, would promise the most possible benefits for developing countries. 3. WTO negotiations about RTAs: in Doha declaration, there was a signal to the RTAs as a possible major player in terms of trade liberalization promotion, and fastening economic development. The declaration also emphasized the need to a harmonized relationship between multilateral and regional progresses. Consequently, ministers agreed to launch special negotiations in order to clarify and enhance rules and procedures related to the RTAs in the WTO. The idea was to facilitate establishing cross-regional trade agreements, try to find better controlling on RTAs dynamic, and reduce risks resulted from RTAs proliferation. After launching negotiations about rules of RTAs in Doha round, some technical issues were put on table of negotiations, such as rules of origin and proposed procedures to ensure that RTA rules are consistent with WTO rules. RTAs negotiations proceeded on two ways: one of technical nature, and another with loyal and regulatory scheme. Negotiations made some progress on the second way, but they still facing some difficulties considering strong correlation between RTAs rules with other legislative area. Regarding the first way, WTO members signed formal agreement about initial decision that comprises a mechanism to ensure transparency in terms of RTAs. The decision was applied since December 2006; the rest is waiting the conclusion of Doha round. 4. WTO rules about RTAs: basically, RTAs are against WTO none discrimination principle, but article 20 of GATT, as well as WTO agreement 1994, exempt RTAs from these rules, conditioned to respect some provisions that circle around one point: the RTA has to be in favor of multilateral liberalization, and not in contrast with it. The provisions state that: The aim of an RTA should be trade facilitation among its members, and not hinder third parties’ trade. Enabling Clause: it means the possibility of launching preferential agreements with developing countries, in case they do not create barriers to third parties’ trade, and the WTO secretariat is informed about the agreements. WTO members are obliged to inform the WTO secretariat about new RTAs, and their harmony with the WTO rules. These are then discussed in RTAs and bilateral committee, which states its final decision (Hoekman B. et al. 2002) RTAs motives can necessitate the creation of regional arrangements resulting in exclusion which may be contrary to the view of multilateral initiatives. Regardless of whether regional arrangements seek to pursue goals compatible with multilateralism or to short-circuit the discipline of non-discrimination, RTAs can pose threats to a coherent and active multilateral trading system. The existence of numerous overlapping arrangements can distort trade, raise transactions costs, and undermine the systemic integrity of multilateralism. Regional trading agreements can strengthen vested interests hostile to non-discriminatory outcomes. They can weaken resolve to make multilateralism work by draining away scarce negotiating resources and reducing the effectiveness of pro-liberalization forces in the domestic economy. The GATT/WTO rules have sought to discourage these features of preferential trading arrangements, but have not achieved what governments would have wished. Clearer rules are important, but insufficient. Political commitment and a clear understanding of the consequences of preferential trading arrangements are vital if the multilateral agenda is to be carried forward. Two rules of policy behavior could help to consolidate and build upon the benefits of regionalism and promote a more effective multilateral trading system. The first rule being to refrain from engaging in regional commitments which governments would be unwilling, sooner or later, to extend to a multilateral setting. The second is agreeing to a consultative system that would map and supervise the timing and conditions related to the non-discriminatory, multilateral application of commitments made in regional arrangements. This can result in a more effective link between regionalism and multilateralism than exists today. Disadvantages of FTAs compared to multilateral trade agreements It has widely been accepted that bilateral agreements, especially between a developing and a developed country, are not the best option and that multilateral negotiations and agreements are preferable. The reasons for this include: 1. Bilateral agreements usually lead to trade diversion in that the partners divert away products that may be more cheaply priced in favor of products from the FTA partner, even if they are not cheaply priced, thus resulting in inefficiency. 2. In an FTA between a developed country and a developing country or countries, the latter are usually in a weaker bargaining position due to the lack of capacity of their economies, their weaker political situation, and their weaker negotiating resources. 3. In the WTO, the principles of special and differential treatment, and less than full reciprocity, are recognized. Thus, developing countries are better able to negotiate on the basis of non-reciprocity and for non-reciprocal outcomes, in which they are not obliged to open up their markets to the same degree as developed countries. However, these development principles are lacking in FTAs. The FTAs are basically on the basis of reciprocity. This equal treatment of parties that are unequal in capacity may result in uneven outcomes. 4. The FTAs contain many items that are not part of the rules of the WTO. Many North-South FTAs include rules on investment, government procurement and competition law, which have so far been rejected by developing countries as subjects for WTO negotiations or rules. Developing countries also refused that labour standards and environment standards be subjects of discussion in the WTO. 5. Even where issues are already the subject of rules in the WTO (e.g. intellectual property and services), there were many “flexibilities” and options open to developing countries in interpreting and in implementing obligations in these areas. However, there are attempts by developed countries to remove these flexibilities for developing countries in the FTAs a move that can slow development in developing countries. Implications for Australia’s trade policy interests towards the WTO A major goal for Australia’s global trade policy is to maintain the effectiveness and authority of the WTO multilateral trading system. Australia trades globally hence its exports go to and its imports are sourced from all regions of the globe. This pattern has been crucial to the success of Australian trade over the last few decades and was instrumental in minimizing the fall-out from the Asian economic crisis of the later 1990s. Thus, it is in Australia’s interests to seek liberalization of trade on a world-wide basis and the development of universally accepted rules governing trade. Furthermore, elimination of global protection of agriculture, a core goal of Australian trade policy, can only be achieved with global solutions through the WTO. The WTO provides the only system through which powerful economies like the European Union, Japan and the United States can be induced to remove unfair trade barriers to exports of agricultural products. Consequently, no public policy case can be sustained to argue that for Australia negotiation of an FTA with the United States is a credible alternative to negotiations in the WTO. The case for an FTA stands on its own merits, as does the case to prosecute global trade liberalization through the WTO. Implications for Australia’s regional relationships There have been questions on whether Australia can strengthen its relationship with the US without raising questions in East Asia about its commitment to East Asian regionalism. Australia remains a leading proponent of APEC and it embraced the proposals from ASEAN to link the ASEAN Free Trade Area with the Australia-New Zealand Closer Economic Relations Trade Agreement. It was failure of ASEAN countries to agree among themselves to proceed with this concept that put the idea on hold. Australia is nevertheless an enthusiastic participant in the less ambitious goal of building a Closer Economic Partnership between ASEAN and Australia and New Zealand. Australia is also negotiating a free trade agreement with Singapore and has agreed to a joint scoping study with Thailand on a possible free trade agreement. So long as Australia is negotiating agreements with East Asian Governments and stands ready to pursue any proposal to achieve economic integration with other countries in East Asia, pursuing an agreement with the US should not detract from Australian engagement with East Asia. While maintaining its support for economic integration in and with Asia, there is no good reason why that goal should lead it to set aside proposals to enhance economic interdependence with countries or regions outside East Asia where significant benefits can be won. The second impact to consider on other countries in the region is whether or not an Australia-US FTA would create trade diversion and damage the interest of other trading partners. However, the risk of trade diversion from an Australia US FTA is small so long as barriers to other countries are low and continue to be lowered. Best practice benefits from an FTA can extend to business culture in Australia as well as public policy. Companies learn from each other as much as they draw from the lessons of their own experience. They observe their competitors, suppliers and customers and modify their own strategies to keep abreast of the latest developments. Modern business practices in Australia already draw heavily on US standards and practice, especially in the use of technology as a business tool and in the application of management techniques. It is a process smoothed by Australia’s cultural affinity with the US. The growth of trade and investment will amplify the opportunities for businesses to raise their productivity and hence profitability. Learning from best practice also takes place at the level of government. It has been noted in both Europe and other regions that a process of economic integration between nations can generate a ‘policy reform effect’ that can enhance the benefits of the process both for internal participants and for businesses from third countries. For example, regional integration might strengthen a country’s competition policy or improve public policy in areas like government procurement and intellectual property protection (APEC Study Centre, Monash University, August 2001). Conclusion In conclusion, it’s essential to try and keep RTAs opened as possible so as to avoid changing trade direction, and to avoid markets' distortion which may in turn cause considerable harm to other countries especially developing countries .In addition any move taken by governments who are members of WTO should ensure that it’s in line with the principles of WTO otherwise it can be seen as a way aimed at undermining the principles of WTO which they stand for. It is clear that majority of the Governments prefer regional trade agreements for various reasons. Some may see regional agreements as a necessary mechanism that can help protect them from being excluded by other nations. On the other hand, some may view this as a means of increasing bargaining power in a wider setting. Politically, preferential trade arrangements can assist in consolidating regional security. However, these motives can also necessitate the creation of regional arrangements resulting in exclusion which may be contrary to the view of multilateral initiatives. The benefits for Australia in negotiating an FTA with other countries such as the United States are significant and wide-ranging. The immediate benefit being that of attracting greater investment from the United States and increased trade as a result of the removal of trade barriers. A Free Trade Agreement between Australia and the United States would inject a new enthusiasm into the liberalization process. The long-term benefits include strengthening of the overall relationship with the United States. It is appropriate that the defense core of the relationship be broadened by adding an economic core given that in today’s world, nations mark closeness of relationships between states by economic linkages as much as military linkages. However Australia should ensure that in doing so it does not discriminate against regional countries such as those in East Asia as this can impact them negatively as a country. Reference APEC Study Centre, Monash University. (2001). A Report for the Department of Foreign Affairs And Trade. ESCWA. (2007). Main information memorandum, regional forum about “trade facilitation and Regional trade agreements,” organized by the ESCWA, the UN and Jordanian Ministry of Industry and Trade, Amman. Hoekman B. et al. (2002). Development, Trade, and the WTO, the World Bank, Washington DC. Khor, M. (2005). Bilateral/regional free trade agreements: An outline of elements, nature and Development implications. Khor, Martin. (2005). Intellectual Property, Competition and Development. Paper presented at The WTO symposium on intellectual property and development, May 2005. Limao, N. (2005). ‘Preferential vs. Multilateral Trade Liberalization: Evidence and Open Questions. World Trade Organization. (1994).The results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts. World Trade Organization. (2003). World Trade Report 2003, pp. 46-66. Read More